FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Application of "Insubstantial Portion" Exception to
Conversion Transaction Moratorium Where Bank Merges with Trust Company
Which Does Not Hold Deposits

FDIC-91-83

October 29, 1991

Valerie J. Best, Counsel

I am writing in response to your inquiry concerning the application
of the "insubstantial portion" exception authorized by 12 USC
1815(d)(2)(C)(i) to the proposed merger of * * * ("Trust
Company") with * * * ("[Bank]"). Trust Company will be
absorbed into [Bank], and [Bank] will continue operations. Trust
Company is a member of the Bank Insurance Fund ("BIF"); [Bank]
is a member of the Savings Association Insurance Fund ("SAIF").
Trust Company asserts that it does not currently hold, and has never
held, deposits (whether or not
insured.).1
Trust Company asserts that it is not authorized to accept deposits
other than trust deposits. As to trust deposits, Trust Company asserts
that any and all cash received from its customers is transferred upon
receipt to accounts at other banks.

The proposed merger of Trust Company into [Bank] would be a
conversion transaction. Based upon the facts presented to us by Trust
Company, it is our opinion that the FDIC could, if it found that it was
otherwise appropriate, approve the conversion transaction pursuant to
the insubstantial portion exception contained in 12 USC
1815(d)(2)(C)(i).

The term "conversion transaction" is generally defined to
include a change of status from a SAIF member to a BIF member, or vice
versa; the merger or consolidation of a SAIF member with a BIF member;
the assumption of deposit liabilities of a SAIF member by a BIF member,
or vice versa; and the transfer of assets in consideration of such a
deposit assumption. 12 USC 1815(d)(2)(B). The Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") imposed
a five-year moratorium on conversion transactions, with limited
exceptions for (1) conversion transactions that affect an
"insubstantial portion" of the total deposits of each
participating institution, and (2) certain conversions involving
institutions in default or in danger of default. The "insubstantial
portion" exception reads as follows:

(C) Approval during moratorium

The Corporation [FDIC] may approve a conversion transaction
at any time if--

(i) The conversion transaction affects an insubstantial
portion, as determined by the Corporation, of the total deposits of
each depository institution participating in the conversion transaction
. . . .

12 USC 1815(d)(2)(C)(i).

The proposed merger of Trust Company (a BIF-member) into [Bank]
(a SAIF-member) is deemed to be a "conversion transaction"
pursuant to 12 USC 1815(d)(2)(B)(ii). As such, it is prohibited by 12
USC 1815(d)(2)(A) unless specifically excepted by law. As shown by the
above-quoted statute, a conversion transaction may be approved by the
FDIC pursuant to 12 USC 1815(d)(2)(C)(i), notwithstanding the
moratorium, if it affects an insubstantial portion of each
institution's "total deposits." The term "deposit" is
defined to include, among other items, trust funds "received or held
by such bank or savings association, whether held in the trust
department or held or deposited in any other department of such bank or
savings association." 12 USC 1813(l)(2). The term
"trust funds" is, in turn, defined to mean "funds held by an
insured depository institution in a fiduciary capacity and includes,
without being limited to, funds held as trustee, executor,
administrator, guardian, or agent." 12 USC 1813(p).

If Trust Company held funds in a fiduciary capacity, whether held in
the trust department or held or deposited in any other department of
such Trust Company, then it would be holding deposits. As noted above,
however, Trust Company asserts that it does not hold trust deposits.

The issue, then, is whether the merger of an insured depository
institution that is a member of BIF with an insured depository
institution that is a member of SAIF, may be permitted by the FDIC
pursuant to 12 USC 1815(d)(2)(C)(i) where the merging institution does
not have any deposits. More specifically, is an "insubstantial
portion" of the total deposits of each institution participating in
a merger affected where the merging institution does not have any
deposits.2

It is our view that, where the merging institution (that is, the
passive unit that is to be absorbed) does not have, and has not had,
any deposits, the merger may be approved by the FDIC pursuant to the
"insubstantial portion" exception contained in 12 USC
1815(d)(2)(C)(i).

Such an interpretation is consistent with the purposes of the
statute. If the merger of Trust Company into [Bank] were permitted,
no deposits would leave the BIF and no deposits would enter the SAIF.
The current BIF assessment base would not be eroded. SAIF would not be
diluted.

Please call me at (202) 898-3812 if you have any
questions.

1Trust Company did not report any total deposits in its Reports
of Condition and Iincome (Call Reports) for the last several years. Go back to Text

2This transaction differs from a transaction wherein deposits
are to be transferred to a de novo institution, and the two
participating institutions belong to different insurance funds. We have
opined that such a transaction is a conversion transaction and
therefore prohibited by the moratorium. We have further opined that the
insubstantial portion exception created by 12 USC 1815(d)(2)(C)(i)
would not exempt such a transaction from the moratorium. Go back to Text